How Retail Banks Are Shrinking

Investment banking has been the focus of much of the recent news in the financial universe, with politicians urging banks to refocus on their traditional retail operations after perceived excessive risk taking elsewhere.

Yet those operations themselves are changing significantly from the traditional high street banking model. A growing number of analysts are forecasting substantial sell-offs of high street branches as the rise of internet banking continues.

The issues which had the most direct impact on U.K. consumers came from high street banks, where workers were driven by sales targets towards actions like the mis-selling of payment protection insurance, now the most costly bank mis-selling scandal in U.K. banking history.

IfLloyds, Royal Bank of Scotlandand Barclays got rid of 12-14 percent of their branches this year, they could improve their earnings per share by 7, 5 and 4 percent respectively, according to analysts at Bernstein.

Branches are more expensive to run because of higher fixed costs than internet and telephone banking. There are also likely to be further trimmings of staff in both retail and investment banking operations as banks try to reduce their fixed costs – meaning that there will be less need for desks to sit those staff at.

"U.K. branches have been in long-term decline since the 1990s and we expect that the adoption of online banking and mobile banking will accelerate the decline," they argued.

"Data shows that countries with higher internet penetration have greater internet banking usage and in turn lower branch intensity. If the U.K. follows the Nordics in increased internet usage, it could lead to at least a 10 percent reduction in branches."

That increase in internet usage could come if U.K. government targets for 90 percent of the country to have access to superfast internet services by 2015 are fulfilled.

Yet selling off those branches for a reasonable price may be easier said than done, as the recent collapse of a planned RBS sale of 316 branches showed. Banks have moved from the traditional model of owning the property where their branch is located towards renting more branches in recent years – so the branches are of less interest to commercial property investors, who have already had a difficult few years.

As the U.K. high street has continued to suffer from dampened consumer spending and the move towards more internet shopping, there are fewer tenants to fill the gaps left by businesses which have collapsed or reduced their operations.